Staff Report for the 2002 Article IV Consultation Supplementary Information

This 2002 Article IV Consultation for the Kingdom of the Netherlands—Aruba highlights that after growing at more than 4 percent per year in 1996–2000, the Aruba economy experienced two years of retrenchment, with GDP falling an estimated 1.2 percent in 2001 and 3.8 percent in 2002. This downturn reflected a lull in investment activity, but especially weak tourism following the United States recession and the terrorist attacks of September 11, 2001. In 2003, sharply higher private and public investment and a modest revival in tourism should boost economic growth to more than 4 percent.

Abstract

This 2002 Article IV Consultation for the Kingdom of the Netherlands—Aruba highlights that after growing at more than 4 percent per year in 1996–2000, the Aruba economy experienced two years of retrenchment, with GDP falling an estimated 1.2 percent in 2001 and 3.8 percent in 2002. This downturn reflected a lull in investment activity, but especially weak tourism following the United States recession and the terrorist attacks of September 11, 2001. In 2003, sharply higher private and public investment and a modest revival in tourism should boost economic growth to more than 4 percent.

1. This supplement provides an update on the authorities’ monetary and fiscal policy plans outlined in the staff report for the 2002 Article IV Consultation. The staff’s revised macro-economic projections for 2003-04 due to these policy changes are also presented. The revisions do not change the thrust of the staff appraisal. However, they strengthen the case for including additional measures in the 2003 draft budget to ensure substantial early progress towards fiscal consolidation.

2. Following an acceleration in monetary aggregates and consumer price inflation at the end of 2002, the central bank has reimposed credit controls; specifically, the ceiling on the growth of bank lending to the private sector has been set at 7 percent. This monetary tightening is in line with the recommendations in the staff report and was already broadly reflected in the staff projections presented there.

3. The new indirect tax on imports and services (the ABB) will not be introduced by mid-2003 as planned because the authorities judge the technical preparations to be insufficient. In addition, they are concerned about the effect of higher indirect taxes on inflation. The current draft government budget will be revised accordingly, resulting in a revenue shortfall of Afl. 35 million (1 percent of GDP) relative to original plans. Compensatory measures have not been announced.

4. Macroeconomic and fiscal projections for 2003 and beyond have been revised to reflect these policy announcements (Table 1).1 The projections assume that the ABB (or an equivalent revenue-raising measure) will be introduced in early 2004 rather than mid-2003. Under this assumption, the fiscal deficit (including health care) would grow to 5.4 percent of GDP in 2003, but decline to 3.1 percent of GDP in 2004 as the new tax boosts revenues. If the tax increase is canceled rather than postponed, then reaching the target of budgetary balance by 2007 would become very difficult.

Table 1.

Aruba: Revised Projections

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Sources: Data provided by the authorities; and Fund staff estimates and projections.
1

The projections also incorporate small revisions in the estimates of inflation and fiscal revenues for 2002 reflecting new data releases.

The Kingdom of the Netherlands-Aruba: 2002 Article IV Consultation-Staff Report; Staff Supplement; and Public Information Notice on the Executive Board Discussion
Author: International Monetary Fund